China's Rise, World Order, and the Implications for International Business.

Date01 Febrero 2021
AuthorGrosse, Robert

1 Introduction

Scholars and commentators increasingly see China as a global superpower (Anngang 2012; Cao and Paltiel 2015; Fish 2017) and China's rise is widely understood to be ushering in a new global power distribution (Maher 2016; Shifrinson 2018; Tunsjo 2018; Zeng and Breslin 2016; Xuetong 2019). (1) China has the world's second largest economy, hailing only the United States (International Monetary Fund 2020). It was the world's leading exporter and second largest importer in 2018, the last year for which data were available (World Bank 2020a), and its foreign aid provision and outward foreign direct investment (FDI) have also grown over the last decade (Dreher et al. 2018; Kolstad and Wiig 2012; Wang and Zhao 2017). Accompanying China's economic rise has been an escalating assertiveness geopolitically (Liao 2018) that reflects China's growing hard power (Robertson and Sin 2017; Tayloe 2017) and soft power capabilities (Shambaugh 2015).

In short, there is now a strong case to be made that the world has entered an era in which the US and China are approximately equally powerful. This is a marked contrast from the post-World War II era, during which the US dominated in the realms of economy, security, and technology (Ikenberry 2005). China's emergence as a comparable power to the US raises concerns, since "realist" international relations theory suggests that such a trend will lead to a collapse of globalization as countries reject economic openness in favor of economic nationalism (Mearsheimer 2019). In contrast, we argue that China's rise does not have to result in reduced international economic integration, and so we present a first research proposition to explore this issue:

Proposition 1: China's rise will not promote de-globalization, though it will lead to jostling for power between the US and China.

There has been a rise of political nationalism in the latter half of the 2010s (Snyder 2019). This has been accompanied by some degree of economic protectionism (Fajgelbaum et al. 2020), raising alarms among business leaders (Edgecliffe-Johnson and Waldmeir 2018). Much has also been made of the ongoing US-China trade war and hostility by US leadership toward the international institutions tasked with supporting economic globalization (Brown and Irwin 2019). However, these concerns may be overblown, as world tariff levels remain low by historical standards (Russ 2019), international trade and investment remain at or near their peaks, and the incoming Biden Administration may be more supportive economic globalization.

In fact, there are significant reasons to suspect that China's rise will not usher in an era of protectionism and deglobalization. In the analysis that follows, we theorize that a world order in which China and the United States constitute a "G-2" can be conducive to the continuation of global economic integration. Maintaining a relatively open world economy is in the national interests of both of these countries. For that reason, both have committed themselves to international and regional economic agreements to help sustain that outcome. As long as both the US and China see the maintenance of the globalized world as being in their interest, each will adhere to the norms supporting globalization and help those norms to endure. In this sense, as we will explain further below, they will act as "dual hegemons." As we demonstrate in our analysis, the evidence supports this expectation, such that economic globalization has persisted even as China has become a superpower on (or near) par with the United States.

Even so, China's rise and the changing global power dynamics that are accompanying it carry significant risks for international business. The new order brings changes to the nature of globalization: Skirmishes between China and the US may disrupt supply chains, threaten new and existing FDI, and include the establishment of new trade barriers. While we do not expect these changes and conflicts to cause a decline in net global integration, we argue that multinational firms need to evaluate and manage the risks that will occur as a result of changes in the nature of globalization.

Just dealing with China has been a risk for foreign businesses, because of the Chinese government's protectionist tendencies. For example, China requires foreign auto manufacturers to have local partners with at least 50% ownership, as with Volkswagen and GM in their joint ventures with Shanghai Automotive. The government has also shown its disapproval of moving information across borders, as in the case of Amazon Web Services being essentially shut out of the market, and Google and Facebook being severely restricted and banned, respectively. And these policies predate the China-US trade war, which further threatens US-based businesses in China as well as Chinese business going overseas, particularly to the United States. The trade war has resulted in tariffs being imposed on a wide range of products, from steel and aluminum imports into the US to agricultural products exported from the US to China.

While the recent US-China trade tensions are likely to die down, the emerging world order is sure to create more frequent risks for companies engaging in international business, making risk management a priority going forward. A risk management strategy can be sketched broadly by looking at the methods available to MNEs for this purpose. Companies can explore the establishment of production and distribution facilities located outside of the two main protagonist countries. For example, electronics could be assembled in Vietnam or in Thailand rather than only in China; and Mexico or Colombia could be used for additional assembly of electronics, autos, and textiles. Companies also can diversify their business activities such as sales and input purchases into additional countries, again to reduce the dependence on the two main protagonists. A wide range of steps could be taken to mitigate the risks, from the use of insurance contracts for insurable risks to partnering with local companies in the US and China to reduce the liability of foreignness. So, we present a second research proposition:

Proposition 2: MNEs need to develop risk management strategies to deal with the US-China competition that will occasionally produce trade barriers and other policy interventions.

The remainder of our analysis proceeds as follows. In Sect. 2, we discuss China's rise and demonstrate that US and China are approximately equally powerful hegemons. Next, in Sect. 3, we introduce our theory, which posits that global economic integration will persist through an era in which China and the United States are each global superpowers, drawing on theories of international relations. In Sect. 4, we present the evidence so far, which suggests that little shift in global economic engagement can be attributed to China's rise. In Sect. 5, we discuss in more detail the implications for multinational enterprise (MNE) strategies and we lay out a framework for managing this geopolitical risk. Finally, we note challenges to long-term stability in a world with two global superpowers.

2 Changing Power Dynamics in the Twenty-First Century

China's rise is, perhaps, the single most important economic and political phenomenon in the twenty-first century. It has implications for global security (Toje 2018), for international development (Gallagher and Porzecanski 2010; Lin 2018), for global governance (Beeson and Li 2016; Economy 2018), and for human rights (Gamso 2019), among other things. While China's status in international trade is especially noteworthy, it is also growing by other measures of international power. China's growing clout in international production and financial markets are evident in terms of its global leadership in overall manufacturing, in the offshore assembly of electronics and textiles, and its growing financial leadership through owning the world's four largest banks. China is also growing in global leadership through development of new institutions such as the Asian Infrastructure Investment Bank (AIIB), the recently signed Regional Comprehensive Economic Partnership (RCEP), and its Belt and Road initiative (Soong 2018). The Belt and Road scope is pictured in Fig. 1.

In terms of total market size, China is nearly as large as the US and much larger than any other country, whether measured in current dollars or in purchasing power parity dollars. In 2019, US GDP was $US 21.4 trillion, while Chinese GDP was $US 14.1 trillion in nominal terms and in purchasing power parity terms, Chinese GDP was $US 27 billion. In terms of company competitiveness, China had 119 Fortune Global 500 companies and the US had 121 in 2019. In terms of innovation, measured as R&D spending in the country, the US led the world by far with spending of $US 581 billion in 2018, while China was second with $US 293 billion, and both countries were far ahead of the third leader, which was Japan at $US 193 billion. (2) Table 1 presents a comparison of China and the US in terms of some key economic/business indicators.

China has also modernized the People's Liberation Army (PLA) in order to counter potential invasion (Montgomery 2014), while asserting its dominance over the South China Sea (Morton 2016; Thayer 2011; Turcsanyi 2018). Likewise, China has become a major producer of science and technology, owing to public investment in the sciences such as the 2006 Medium to Long Term Program of Science and Technology (MLP) and Made in China 2025 initiative (Cao et al. 2006; McBride and Chatzky 2019; Xie et al. 2014). Taken together, this expansion of Chinese power suggests the emergence of a new world order, in which there is a roughly equal distribution of power between the United States and China.

While the US and China are rivals on some political issues (Scobell 2018), they do not necessarily have different visions for the global economy, as both operate...

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